Jeremy Grantham's January Letter To Investors

I love the Internet.  Direct access to real people and their real thoughts is such a great thing.  Here is Jeremy Grantham's January Letter Investors.  It's a fantastic read.  In fact, he references a piece that I highlighted awhile ago in the NY Times by Einhorn and Lewis as "a great job of summarizing where we are and how we got here, as well as offering some helpful advice for the future".  Couldn't agree more.

First, who is Jeremy Grantham and why do I listen to him?  From Wikipedia:

Jeremy Grantham is the Chairman of the Board of Grantham Mayo Van Otterloo, an American investor well known among institutional investors, but relatively unknown to retail investors. He is regarded as a highly knowledgeable investor in various stock bond and commodity markets. Grantham started one of the world's first index funds in the early 1970s and currently manages approximately $120 billion US. Grantham's quantitative research has revealed reversion to the mean in all bubbles in all commodity, stock and bond markets studied excluding timber.

This guy knows his stuff and has been very right about the direction and severity of our current crisis.  I don't think he's a "broken clock" either, he seems to me to be right for the right reasons -- a critical distinction.  This is why I take his perspectives on how we got here very seriously (that and the fact that meshes well with my own understanding of things).

Here's a key quote from the letter that I am in love with:

Ingenious new financial instruments certainly facilitated and exaggerated these weaknesses, but they were not the most potent ingredient in our toxic stew. That honor goes to the economic establishment for building over many decades a belief in rational expectations: reasonable,

economically-induced behavior that would always guarantee approximately effi cient markets. In their desire for mathematical order and elegant models, the economic establishment played down the inconveniently large role of bad behavior, career risk management, and flat-out bursts of irrationality.

He's taking another pot-shot at economists and Objectivism again, which I'm perfectly fine with.  If you're a regular reader of this blog, you know that I have been aggressively illustrating the fallacy of relying on economists as a source of financial guidance.  And don't get me started on Ayn Rand or Objectivism! 

The dominant economic theorists so valued orderliness and rationality that they actually grew to believe it, and this false conviction became increasingly dangerous. It was why Greenspan and Bernanke were not sure that bubbles – outbursts of serious irrationality – could even exist. It was why Bernanke, who had studied the bubble of 1929, could still not see it as proof of irrationality and could still view the Depression (à la Milton Friedman) as a mere consequence of incredibly bad, easily avoidable policy measures.

I wish I could transmit my thoughts with such clarity.  Until that happens, I will settle for surfacing the great works of others.

Richard Parson's to become Chairman of Citigroup

What part of "He drove TimeWarner straight into the ground without passing Go or collecting $200 do people not understand?"  Seriously, yet another "up is down" development in regards to the governance of our financial institutions.  Story here.

Obama: Why Geithner?

So, I'm in the camp of wanting Obama to succeed.  We simply can't afford for him to fail.  However, I am not in the camp of Whatever-Obama-Wants-Is-A-Great-Idea-To-Me.  First I had a problem with Bill Richardson, his nominee for Treasury Secretary.  It was a purely political move and I thought we were about Change We Can Believe In.  Now I have a real problem with Timothy Geithner, Obama's nominee for Treasury Secretary.  Geithner was the top executive in NYC while the entire credit derivatives fiasco went down.  In fact he calls it his "life's work".  Uh, really, your life's work was to oversee the greatest build-up and explosion of financial destruction seen since the Great Depression of the 1930's?!

Who wants this guy to lead our Treasury Department again?  

Why aren't people stepping up and asking these questions?  I'm reading NYT's LiveBlogging of Geithner's confirmation hearings and the only sane people in the room are Jim Bunning and Charles Grassley!  Trust me, I do not find myself agreeing with conservative Republicans often as they have as much to do with this as anyone.

Sure, Geithner's tax problems are troubling, but this is one step above driving in the carpool lane alone in my book.  I'm more concerned about whether Democrats are falling all-over themselves to endorse him based on his connections, rather than his ability to critically understand the drivers of the economic and financial crisis and create solutions that will solve the problems.

Right now, my bet is not.

I hope I'm wrong.

Paulson's Capital Cram has no Multiplier

I have to change my anti-media rants because there are some outlets and some writers who refuse to submit to the errors of their business overlords and the mediocrity of their colleagues.  NYT and Newsweek, I'm looking at you.  Great article in the NYT discussing how smaller, healthier banks are hoarding the money they received through the TPILF...I mean TARP.  The author, Mike McIntire, did a very simple thing, he went through the transcripts of as many earnings calls and investment conferences, he was able to get a more candid view of the banks plans for the money than what they are providing through worthless press pronouncements.

“With that capital in hand, not only do we feel comfortable that we can ride out the recession,” he said, “but we also feel that we’ll be in a position to take advantage of opportunities that present themselves once this recession is sorted out.” (Walter M. Pressey, president of Boston Private Wealth Management)

This has some amazing implications.  Before the TARP was approved, I had a discussion with a friend of mine who invests in financial institutions for a big-time money manager.  His argument was that TARP should be approved because it would inject money into the economy, which through the magic of an economist's Multiplier Effect would have an outsized effect on the economy.  Looks like Boston Private is exhibit #1 in how that's not going to happen.  If the banks take the money and sit on it, as it appears they are more than happy to do, then it doesn't have any impact other than making already healthy banks wealthier.

And they just approved part II of this beast?  Not only is our government not responsibly regulating bad industries, they now appear to be magnifying their bad decisions.

I'm pretty sure that putting $750 Billion dollars into the hands of the lower economic stratus of our economy would have a much, much larger multiplier effect than these idiots.

Finally, someone in the media calls it like it is!

There's a great article by Daniel Lyons of NewsWeek illustrating how the media gets played by corporate P.R. departments.  He does a great job taking apart one of my least favorite business media types -- Jim Goldman.  I've seen him in action, up close and personal, and he epitomizes the typical empty-suit media type that is eating mainstream media from within.

Great quotes:

"That's what happened to the poor guy at CNBC. Sure, he got his share of "exclusive" ten-minute spots with Steve Jobs. You can find them on YouTube. They look like training videos for a correspondence course on bootlicking. Now, of course, the CNBC guy says he's outraged. He sputters about how Apple has been irresponsible and "deplorable." His pals at Apple won't care. They're already moving on to the next useful idiot. Among the Silicon Valley press corps there is no shortage of them."

Exactly, and that's one of the main reasons why people are turning to blogs as a new medium.  There are others of course (timeliness, etc...) but this reason is the one that not enough people are talking about.  Now of course, the hypocritical part of this post is that I sourced from a mainstream media itself.  So maybe I should divide my evaluation of the media into:  Those who get it (Newsweek & Daniel Lyons) vs. Those who don't (CNBC & Jim Goldman)

A financial modeler's manifesto - hard to model human behavior

Finally, someone says it correctly.

Our experience in the financial arena has taught us to be very humble in applying mathematics to markets, and to be extremely wary of ambitious theories, which are in the end trying to model human behavior. We like simplicity, but we like to remember that it is our models that are simple, not the world.

Bingo!  Unfortunately, this is one of those "esoteric topics" that is "hard for the average person to understand" so it probably "won't get widespread attention" although it's one of the fundamental issues that "caused the current financial meltdown".

Ever notice that WSJ Opinion Pieces don't allow comments?

It's probably because they're all pretty lame.  Latest piece which is tops on the most read list on WSJ is one titled:  "'Atlas Shrugged':  From Fiction to Fact in 52 Years".

Really?

I always wonder about the delusional capacity of people who believe that Atlas Shrugged should be used as a template for real-world action.  It's a piece of fiction.  It's like it has become the greedy capitalist's version of The Lord of the Rings.  Stephen Moore, the piece's author, seems to believe that current events are playing out as a direct corollary to the book's themes (Atlas Shrugged, not LOTR.  Although analogies with that book might be pretty entertaining).

His main thesis is thus:

For the uninitiated, the moral of the story is simply this: Politicians invariably respond to crises -- that in most cases they themselves created -- by spawning new government programs, laws and regulations. These, in turn, generate more havoc and poverty, which inspires the politicians to create more programs . . . and the downward spiral repeats itself until the productive sectors of the economy collapse under the collective weight of taxes and other burdens imposed in the name of fairness, equality and do-goodism.

Government programs create havoc and poverty?  Really?  I love this sweeping assumption which has no basis in fact at all.  It's just a prejudice that Republicans love to hide behind, kind of like a religion.  Is there any support for this?  Not really, there have been many, many government programs that have been extremely helpful to our society.  Highways are pretty helpful.  They help companies transport supplies and goods and stuff.  Guess what?  Government built that.  Shocking, I know.  Weights and Measures departments are pretty useful as well.  I like knowing that someone out there is checking each gas station to ensure that when I pay for a gallon of gas, I'm getting a gallon of gas.  Revolutionary stuff that a private company without oversight would eventually screw up.

The idea that private corporations are the answer to all of society's problems is so wrong, it's farcical.  I honestly don't know how all of these Randian/Objectivist wingnuts actually function in society with these beliefs.  Clearly a lot of people believe this crap and in fact there are a lot of successful people who are fervent believers.  Many of our top executives are big-time Randian/Objectivist followers.

But they're also wrong.

Exhibit #1:  Alan Greenspan -- thought that rational self-motivation would cause banks to properly assess and manage risk.  Completely wrong.  So wrong, it f'd up our economy.  And this guy did it by the book.

The fact that they don't understand that there are some things in society that need to be a public good and the best way to fund and provide for them is in the form of a government program confounds me.  Can you imagine if our highway system was built by private corporations?  The amount of toll friction to get anywhere would completely overwhelm the freedom from geography we currently enjoy.  Additionally, I can easily see a scenario prices would skyrocket if there was a natural disaster and people needed to flee a certain area.  Look what happens after natural disasters, prices of replacement goods go through the roof.  Yes, it reflects market mechanisms.  No, it's not good for society and generates results that suck for everybody.

Exhibit #2:  Enron -- these guys were the ultimate free-marketeers.  They were also the guys who took joy in "ripping off Grandma's face" in terms of higher electricity prices created through false scarcities.  They fraudulently gamed a system for pure profit motives to the detriment of our largest tax-generating state.

What frustrates me most is that I haven't seen a good, fundamental refutation of Objectivisism being publicly discussed.  Objectivism (plus Religion) has been the core philosophy of the Republican government that has destroyed the functioning of our markets.  The removal of governmental oversight from our largest financial markets is largely responsible for much of the mess we're in.

Exhibit #3:  Fannie Mae/Freddie Mac -- now this isn't quite as clear cut because they are hybrid governmental/capitalistic vehicles.  And frankly as much blame can be put on the Clinton adminstration for encouraging these guys to pursue subprime markets.  But if you read Bill Burnham's great post on this, you'll see that this can be traced back to a very sophisticated lobbying effort started by the officers of the companies who were, get this, just trying to put into place a strategy that maximized their compensation.  A very Randian thing to do.

The opinion piece is here.  Read it if you want to witness a delusion in action.  It would be pretty funny if most of our current Republican apparatachick didn't fervently believe it.

So let's hope the WSJ turns on comments for their opinion pieces.  It's time someone ripped these guys apart.

Can we put a bullet in Economists yet?

Heard on Bloomberg radio this morning as stated by Chris Whalen of Institutional Risk Analytics:  "The Fed is full of economists.  They know nothing.  They need our help.  Let's help them understand that putting more money into the banks will not do anything to help our economy."  (Or words to that effect.)

Yes, brother, yes!

If this gets ugly...

It could get...er...real ugly.

Check this out.

Surprise! Hedge Funds trade with inside information. Whocoudanowd?!

Arthur Samberg, the CEO and Chairman of Pequot, a giant hedge fund is coming close to being the guy who rips the band-aid off the fact that hedge funds use inside information to generate their returns.  A complex Portfolio.com article outlines how he uses inside information gained from a contractor to trade Microsoft's earnings to great success (+$12MM).  This could be the match that lights the tinder of the fact that a lot more of the hedge industry uses inside information than you would believe.  Gerson Lehrman, a firm that sets up conference calls between "industry consultants" and hedge fund investors, has built a multi-hundred million dollar business based on this model.  They have been finding people within companies for years and brokering calls with hedge funds.  Hedge funds pay big money for these calls because they can usually pump the industry consultants -- people who work in big companies but are moonlighting on the side who may or may not know they're being pumped for information.

It's an offense to all of the other investors who are just trying to play the game fairly.  And at some point, this scheme will be revealed.  Maybe.

Satyam's Fraud Just the Latest Cockroach To Emerge

So, apparently the exportation of America's culture is alive and well.  It just has a bit of a lag.  Satyam's founder disclosed that he had been falsifying accounts in a yarn that starts to smell a lot like Enron.  (Eww, smelly yarn.)  And why not?  So many people got so rich doing it in the U.S., why not try it in countries that have weaker regulatory and legal structures?

We'll be seeing much more of this as time goes on and the repression starts to uncover the warts that a bull market tends to hide.  In investing it's called the cockroach theory.  Financial mistatements and fraud are like cockroaches, once you see one, you can bet there is happy family of a thousand or so living snugly somewhere under your cabinets.  You'll be a stomping, pesticide-spraying fool for months to come!

Michael Hirschorn at the Atlantic Does Not Have A Clue

You know, I just get done praising an excellent article in the New York Times and then something comes along which strengthens my belief that the Mainstream Media is out of their mind.

I just don't get how journalists don't get why they're being disrupted in a wholesale way.  The Atlantic just published an article by Michael Hirschorn that demonstrates he clearly doesn't have a clue.  Not only does not have a clue, the ideas he does have are so totally off-base, it would be amusing if it weren't sad.  Journalists think they are, quite literally, gods gift to the world. Without them, there is no possible way that people can understand what is going on.  The world NEEDS people who don't have any experience in the topics they write about to explaing things to them because clearly only someone without experience will truly understand a complex topic.

Some winner quotes:

The collapse of daily print journalism will mean many things. For those of us old enough to still care about going out on a Sunday morning for our doorstop edition of The Times, it will mean the end of a certain kind of civilized ritual that has defined most of our adult lives. It will also mean the end of a certain kind of quasi-bohemian urban existence for the thousands of smart middle-class writers, journalists, and public intellectuals who have, until now, lived semi-charmed kinds of lives of the mind. And it will seriously damage the press’s ability to serve as a bulwark of democracy.

Uh, did he just say that the loss of newspapers will remove both furious widespread mental masturbation AND the "bulwark of democracy"?!  Seriously, newspapers lack of capability to find and tell the real stories of how things are is one of the reasons why our democracy is in danger.  Newspapers haven't bulwarked much of anything except the P.R. agency which plays them like little bitches.  Bulwarks my ass.

This prompted Henry Blodget, whose Web site, Silicon Alley Insider, has offered the smartest ongoing analysis of the company’s travails, to write: “‘We expect that we will be able to manage’? Translation: There’s a possibility that we won’t be able to manage.”

Really, did the bulwark defender just quote from a blog that has "the smartest ongoing analysis"? Wait until you read the next quote.  This is a classic.

Internet purists may maintain that the Web will throw up a new pro-am class of citizen journalists to fill the void, but for now, at least, there’s no online substitute for institutions that can marshal years of well-developed sourcing and reporting experience—not to mention the resources to, say, send journalists leapfrogging between Mumbai and Islamabad to decode the complexities of the India-Pakistan conflict.

Seriously, I can't write a better hypocritical statement if I tried.  The best part of those two quotes above is that they're actually the first and second half of one paragraph.  If he's not being funny then he's Exhibit A in Why Mainstream Media Sucks Ass.  He doesn't get that the reason why no one values sourcing and reporting is because the sources ARE MAKING THEMSELVES HEARD DIRECTLY ON THE INTERNET THROUGH BLOGGING.  I've been a source for reporters a few times and my experience is that they have no clue, take quotes completely out of context and are filling out predetermined outlines they've already created.  Seriously, they come to interview me because I'm the supposed expert on a certain topic and then they tell me to give them a "killer quote" about the topic that fits their outline.  Wha???  The American readership has picked up on this perversion of information and is now voting with their attention.  They're not voting for professional journalism.

The conundrum, of course, is that those 1 million print readers, who pay actual cash money for the privilege of consuming the paper, and who are worth about five figures a page to advertisers, are far more profitable than the 20 million unique Web users, who don’t and aren’t. Common estimates suggest that a Web-driven product could support only 20 percent of the current staff; such a drop in personnel would (in the short run) devastate The Times’ news-gathering capacity.

Really?  Because I have a friend that used to work for a prestigious newspaper and they would tell me about how they had scads of six-figure reporters who they were lucky to see in the office twice a year to file two stories.  Give me that job!  It's a license to steal and that's what journos have been doing and now that they've been caught with their hands in the cookie jar, they're...well...f'd.

The Internet has done much to encourage lazy news consumption, while virtually eradicating the meaningful distinctions among newspaper brands. The story from Beijing that pops up in my Google alert could have come from anywhere.

Really?  Because I have about 140 feeds into my RSS reader and they all come from sources that have proven to me that they have value in terms of knowing WTF they are talking about and consistently writing about topics that are valuable to me.  I have to spend a lot of time keeping up with this news flow but it's worth it.  I'm consistently in front of critical trends and with critical information, which is...well...critical to my job.  Oh and the thing about the story from Beijing being from anywhere -- WTF?  See, this is the root of what is happening:  Journalism has become so dumbed down and believes that their readers are idiots.  Guess what, it doesn't take much to figure out when you're reading bad info.  Besides, it probably beats the crap that newspapers have been feeding us for years.

The article goes on and on about this crap for a long time, and eventually he starts opining about what strategy the NYT should use.  Listen, show me a journalist that understands strategy and I'll show you someone who left mainstream media awhile ago and started a blog network.  Rafat Ali understands strategy.  Light Reading understands strategy.  Nick Denton understands strategy.  I'll even choke down a shout out to Kevin Rose and Gabe Rivera -- although the jury is out as to whether they understand strategy or if they just lucked out by one of the million monkeys to accidentally type Shakespeare's works.

Here's the article.  Go visit it so that we can help this guy out as he'll clearly be out of a job soon.

Lewis and Einhorn Nail It

Unbelievably correct article from the NYT.  If you're wondering how our financial markets got so fucked up, then read this.  Even if you're just ignoring financial news because you can't handle how crappy it is, read it.  There is very, very little accurate commentary or analysis out there about how we got here that you owe it to yourself to read the pieces that nail it like a roofing gun.

It's titled: "The End of the Financial World as We Know It".  I'm not going to say I told you so...oops.

Select quotes:

"In the “Highly Likely” scenario, wrote Mr. Markopolos, “Madoff Securities is the world’s largest Ponzi Scheme.” Which, as we now know, it was.  Harry Markopolos sent his report to the S.E.C. on Nov. 7, 2005 — more than three years before Mr. Madoff was finally exposed — but he had been trying to explain the fraud to them since 1999."...

"Indeed, one of the great social benefits of the Madoff scandal may be to finally reveal the S.E.C. for what it has become.  Created to protect investors from financial predators, the commission has somehow evolved into a mechanism for protecting financial predators with political clout from investors."...

"How does this happen? How can the person in charge of assessing Wall Street firms not have the tools to understand them? Is the S.E.C. that inept? Perhaps, but the problem inside the commission is far worse — because inept people can be replaced. The problem is systemic."

And then read the next story they wrote titled:  How to Repair A Broken Financial World

New theme alert: U.S. as a restart/reboot

Two great articles/blog posts that highlight that the U.S. needs a fundamental restructuring.  It's not that we're going through a 'bad time', it's that our systems are broken.  This is more than a simple fix and taking a page from the classic business playbook (I differentiate from the isanity that has lately been called business) the U.S. needs to restructure by improving its systems and replacing the management team.

Peter Rip's post talking about the U.S. as a "Restart" (which benefits him because I suspect that he is positioning his VC firm as specialists in restarts, especially given the money he made on the earlier cycle with the Yipes restart).

Interesting quote:

The USA looks like a classic Restart “opportunity.”  What happens in a restart?  First, existing stakeholders get wiped out; The $7T of ‘new money’ is accomplishing that. Second, management gets changed.  November 4 did that.  We now have new managers who have a four year ‘vest’ and, probably, a ~100 day cliff.   They don’t have a new incentive model – that’s a problem – and we have a tier of managers, called Congress, closely resembling the old group, except for some changes at the edges among the most junior members.

There there is Tom Friedman's "Reboot America", his article in the NYT:

For all these reasons, our present crisis is not just a financial meltdown crying out for a cash injection. We are in much deeper trouble. In fact, we as a country have become General Motors — as a result of our national drift. Look in the mirror: G.M. is us.

Glad to see that others are jumping on the train of realizing that our problems are fundamental which means they'll require some deep fixes.